Cooper Cos. Inc. Corporate Credit Rating Lowered To #BB+#; Outlook Stable

Stocks and Financial Services Press Releases Wednesday January 27, 2016 09:13
BOSTON--27 Jan--Standard & Poor's

BOSTON (Standard & Poor's) Jan. 26, 2016--Standard & Poor's Ratings Servicestoday lowered its ratings, including the corporate credit rating, on softcontact lens and women's health products manufacturer Cooper Cos. Inc. to'BB+' from 'BBB-'. The outlook is stable.

The recovery rating on the 'BB+' senior unsecured debt is '3' indicating ourexpectation of meaningful (50% to 70%, higher end of range) recovery in theevent of default.

"The downgrade reflects an increase in debt leverage to 2.5x for 2016, and1.9x for 2017, stemming from the company's acquisition of Sauflon in thefourth quarter of 2014 and subsequent delays in deleveraging," said Standard &Poor's credit analyst David Kaplan. This higher leverage has prompted us torevise our financial risk assessment from modest to intermediate.

Cooper's acquisition of Sauflon increased its debt load and delays in reducingleverage have led us to revise our assessment of the company's financial riskprofile to intermediate from modest. While the acquisition helped expandCooper's presence in one-day silicon hydrogels, the company has used cashgeneration for items other than debt repayment. Integration of Sauflon'sEuropean operations has not gone as smoothly as originally anticipated,forcing price concessions with some customers.

The company's business risk profile is characterized by concentration in softcontact lenses (which represent 80% of sales) and competition against largercompetitors with more resources. The contact lens industry is made up of veryfew players, with the top four competitors (Cooper included with an

approximately 22% share) making up over 90% of the market. There is somestickiness with the customer base as Cooper markets largely to doctors whodrive loyalty to certain products more so than end users. Although there is atechnology risk related to contact lens material and design, Cooper is on thehigh end of profitability for medical device companies.

The women's health business, Cooper Surgical, provides some diversificationwith a broad offering of surgical, in-vitro fertilization (IVF), and otherwomen's health related products. This segment continues to grow primarilythrough tuck in acquisitions. This segment's growth prospects benefit fromhigh demand for fertility products and procedures.The stable outlook reflects Cooper's likely return to higher margins after theone-time costs of integration (related to Sauflon) subside and our base-caseprojections for maintaining financial risk commensurate with leverage between2.0x and 3.0x. We expect this to be done while holding a fair business riskprofile. While recent acquisitions increased Cooper's debt leverage, we expectthe company to manage that in line with a 'BB+' rating.

Should capital expenditures decrease at an accelerated rate and the companyuse free cash to pay down debt at a quicker pace, rather than for acquisitionsor share buybacks, we would review the rating for a possible upgrade. Thisscenario would involve the company maintaining debt leverage below 2.0x.

We would lower ratings if the company continues acquiring other firms andrepurchasing shares at the expense of debt reduction such that the companywould maintain debt leverage in excess of 3.0x. Alternatively, if competitivepressures or operating costs were to suddenly rise decreasing margins morethan 400 basis points, the company's leverage would be consistently higherthan 3.0x, possibly prompting a downgrade. We also estimate $700 million ofdebt-financed acquisitions at a 10x EBITDA multiple would push the companyabove this threshold.


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